The hottest thing in global economics is an oldie but a goodie. This market darling is enjoying enviable growth and sucking in capital from around the world. It possesses a vibrant labor market and a currency that is not just a store of value, but increasingly seen as an ascendant strategic asset — and it is not the China of yesteryear.
The lucky country is the US, a place so often said to have been on the verge of eclipse for reasons such as big deficits, the euro and China’s seemingly inexorable climb to economic supremacy. Numerous threats have fizzled or have been proven exaggerated.
There is little denying that the past few years have seen a major shift in how the relative strengths and weaknesses of the two are assessed. For now, the US economy is in a good place, as a couple of new reports indicate. Perhaps the biggest threat comes not from outside, but has its origins in domestic strains.
The term dedollarization has been fashionable in the past few years. It is a pithy way of describing disillusionment with the greenback, in part because of sanctions against Washington’s antagonists.
Viewed cynically, this is a successor to dollar debasement, a conservative rally cry in the years immediately after the collapse of Lehman Brothers Holdings Inc, when the US Federal Reserve embarked on massive easing.
The collapse of the US dollar did not happen then and is not occurring now, IMF data showed.
The US attracted almost one-third of investment that flowed across borders since the COVID-19 pandemic erupted, a marked increase from the pre-pandemic average of 18 percent, the data showed.
China’s slice dipped to 3 percent, a bit less than half of what is was in the decade through 2019. That jives with data from Beijing: Foreign investment slowed for a fourth month in April and is down 36 percent from the same period a year earlier.
The once-thriving industry that churned out timetables for when China would overtake the US has gone quiet.
In a major global review, Capital Economics projected that the US would be dominant for some time.
This judgement rests on the US dollar’s premier role, the size and scope of US capital markets, an abundance of natural resources and, at a time of doomsaying about dwindling fertility, a sound expansion in the labor force.
Could this conclusion have been reached at any time? Quite possibly, but vital ingredients are a lead in artificial intelligence and a reaffirmation of financial prowess.
“If you just look at pure economic dominance, China hasn’t come anywhere close to the US, and we don’t think it ever will,” Capital Economics chief global economist Jennifer McKeown said. “There has been a major shift in thinking around this. Economists have been coming around to the view that China’s model just isn’t sustainable.”
If China’s catchup to the US has stalled, then what could undo this monetary version of Pax Americana? Leadership is not just about whether shortcomings ultimately become so great that they trip an incumbent up. A potent rival has to arrive at just the right moment and offer all the advantages and less of the negatives.
That is not China, the eurozone or the collective might — on paper — of the BRICS bloc of Brazil, Russia, India, China and South Africa.
The US dollar is a huge geopolitical asset, but that is not set in stone. If the US loses interest in leadership or its internal divisions prove so deep that fiscal policy truly runs off the rails, the country would ultimately lose authority over the financial system. Chipping away at the Fed’s independence and driving the greenback down for the purposes of gaining a trade advantage would be a deeply troublesome approach.
“If the US doesn’t keep its house in order, dollar dominance would be the least of our worries,” Steven Kamin, former director of the US Federal Reserve Board’s Division of International Finance, and former US representative at the IMF Mark Sobel wrote in the Financial Times last week, reprising their work for the American Enterprise Institute.
The US has sometimes favored what amounts to devaluation, although it has rarely been expressed in quite those terms.
The Plaza Accord of 1985, signed by the then-G5, which became the G7, urged a big appreciation of the yen and Deutsche mark. After the US dollar fell too far, officials tried to reverse the pact.
The policymakers who sank the Bretton Woods system of fixed exchange rates in 1971 also predicted, and possibly desired, a weaker greenback.
The next time someone asserts the US is in decline, ask them how. If they blather about economic foundering, ask them where they have been the past few years.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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